Megacable Holdings, S. A. B. de C. V.'s (BMV:MEGACPO) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Megacable Holdings S. A. B. de C. V's (BMV:MEGACPO) stock is up by a considerable 11% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Megacable Holdings S. A. B. de C. V's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Megacable Holdings S. A. B. de C. V is:

7.6% = Mex$2.6b ÷ Mex$34b (Based on the trailing twelve months to June 2025).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every MX$1 worth of equity, the company was able to earn MX$0.08 in profit.

View our latest analysis for Megacable Holdings S. A. B. de C. V

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Megacable Holdings S. A. B. de C. V's Earnings Growth And 7.6% ROE

As you can see, Megacable Holdings S. A. B. de C. V's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 8.2%. Therefore, it might not be wrong to say that the five year net income decline of 13% seen by Megacable Holdings S. A. B. de C. V was possibly a result of the disappointing ROE.

From the 13% decline reported by the industry in the same period, we infer that Megacable Holdings S. A. B. de C. V and its industry are both shrinking at a similar rate.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Megacable Holdings S. A. B. de C. V is trading on a high P/E or a low P/E, relative to its industry.

Is Megacable Holdings S. A. B. de C. V Efficiently Re-investing Its Profits?

Megacable Holdings S. A. B. de C. V's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 92% (or a retention ratio of 8.0%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 2 risks we have identified for Megacable Holdings S. A. B. de C. V visit our risks dashboard for free.

Additionally, Megacable Holdings S. A. B. de C. V has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 89%. Still, forecasts suggest that Megacable Holdings S. A. B. de C. V's future ROE will rise to 13% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Megacable Holdings S. A. B. de C. V. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.